SAA disturbing news

I read an upbeta comment about SAA in the local press the other day. Billions in losses has turned into some 80 mill in profit.
Well here´s some desturbing news from our friends over at IAG

"Africa’s biggest airline has undertaken yet another odd decision. It
grounded its 744 fleet with no apparent capacity replacement. Now there
is news of a sale and lease back of two of its A346s. In Parliament,
South Africa’s Public Enterprise Minister responded to this news by
saying "Mitigation of the residual value risk in this aircraft type
specifically and to wide-body aircraft in general, reducing currency
risk by replacing US dollar debt with a rand lease structure…"

Now
South Africa is an a insignificant resource exporter. It is the world’s
largest supplier of gold – something people want these days more than
dollars, as the price now hovers around levels last seen when the
Russians invaded Afghanistan. You would think therefore the South
African currency would be strong and likely to remain so for quite a
while.

Yet the minister’s response tells you what SAA wanted
everyone to hear. First the A346 has a residual value risk (no surprise
to you, right?) and that widebody planes are risky (only the Airbus 340
series, not the 777 for example) which is a statement clearly harking
back to the now parked 744s. The truth is more likely that the A346s
are new and therefore have the highest asset value worth selling.

By
mentioning currency risk the airline is saying that it does not believe
the US dollar will remain weak. If it did, then the carrying costs
would decline as the dollar weakens further. Therefore what seems to be
really going on is that the airline is running out of money. Also no
shock to regular readers. By selling these planes the airline’s cash
position is boosted. It appears th sale and leaseback may have been
done through a local bank because the lease is now charged in local
currency. That supports our view that the bank involved sees the dollar
in long term decline and therefore is not a currency risk.

In
summary what we really have here is financial juggling to hide the
operational abashment that is the new normal in South Africa."

Our Readers Comments

  1. Erwin admitted as much that he wanted to reduce SAA’s on-balance sheet gearing.
    However, I’m not as sure as IAG that the South African currency is going to remain strong – large current account deficits are being run. The bank involved does not necessarily see the Rand/Dollar being a one-way bet, it could have hedged its exposure.
    If you’re going to sell aircraft now is the right time in the cycle to be doing so, and the wrong time to be purchasing.

  2. I assume that most of SAA revenue is recieved in Rand. If so doesn’t it makes sense to finance their aircraft in Rand. Anything would be a gamble?
    Maybe the choice of the Airbus is to do with currency too. To buy one now would require € which is also very strong versus the dollar right now so why not unlock the value and reduce debt. Even the “successful” low cost airlines like easyJet use finance and mortgages for some of their fleet.

  3. Well, well, what would you expect? I always thought there was something fishy about the quick decision for SAA to ditch the B777 in faviour of the now discredited Airbus A346. Not only does that aircraft use more fuel, but its sales performance has dried up in the face of the better economics of the B777.
    The records (in performance and sales) of the B777 versus the A346 speak for themselves. Somebody must have been given illgotten wealth or is it abject incompetence?
    Granted the B747 may not have been excellent, but how do you compete with BA Virgin, and all these others with a slow Airbus product?
    The logic beats me!

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